Minus goverment payments: Farm income expected to be flat this year

The U.S. farm economy “caught a cold” in 2002, says USDA's chief economist, and while the patient's expected to improve in the current marketing year, “a boom is not in sight.”

Net farm income took a 29 percent hit last year, dropping to the lowest level since the 1980s and putting many farmers under “tight budget constraints,” Keith Collins said at the 79th annual Agricultural Outlook Forum in Washington. Net cash income was down 22 percent.

USDA projections are that net cash income will be up in 2003, he says, but if government payments to farmers are excluded, the numbers will be basically flat when higher production costs are factored in.

Additionally, the slow pace in signups for farm programs last year resulted in over $4 billion in payments to farmers being shifted from 2002 to 2003, Collins says.

As a result, more farmers had to extend loans, and the impact was felt throughout the agricultural sector, with fewer purchases of machinery and other farm goods. However, farm banks remained in “good, sound condition” and the value of assets held by U.S. farmers continued to grow.

The tight financial situation for farmers was eased somewhat, Collins says, by the fact that three of every four farm households now earn a significant portion of their income from off-farm employment.

The 10 percent of large U.S. farms that are responsible for two-thirds of all farm production continued to show above-average returns.

The “big killer” in last year's dismal farm income picture, he says, was the livestock sector, which was down $10.5 billion.

U.S. exports, which “fared reasonably well over the last couple of years, even with the global economic slowdown,” are projected to hit $57 billion this year, up from $53.3 billion last year.

The USDA's baseline projections, which extend to 2012 and are based on a scenario of “no shocks” and current assumptions about U.S. and world economies, weather, etc., suggest that exports could reach the old record of $60 billion in 2005 and could hit $72 billion.

Weather will be a key factor shaping the near-term outlook for agriculture, Collins says.

However, noting recent stronger prices for major commodities, he cautions that rebounding yields and increased competition around the world will likely cause a pullback in prices.

World grain use, in a continuing uptrend, points to above-normal consumption, he says, along with declining stocks, and could result in the highest prices since the mid-1990s, “but nowhere near the prices we saw then.”

Increasing production from competing countries and newly emerging exporters will dampen any shot at such prices, he says.

Nevertheless, Collins termed the export grains outlook “astonishing,” with forecasts pointing to more than 100 million tons of shipments this year, compared to 34 million tons in 1994/95.

The USDA outlook is for an increase of about 1.5 million acres in corn this year, with a corresponding decrease in soybeans; a 500,000 acre increase in cotton; and a decline in rice plantings due to “very low prices.”

All major crops “look in better balance” in terms of projected carryover, Collins says, with the exceptions of wheat and soybeans, which will rise “only slightly.

Drought forecasts for the Midwest grain areas indicate “a serious situation” for the start of this crop year. “They're going to need cooler weather and timely rains in order to have good crops,” he says.

Weather will also be a determining factor in the recovery of the cattle market, he notes. “Over the past two years, we've been very optimistic about this market — and we've been wrong. The liquidation that started in 1995 is into its seventh year.”

The turning of the cattle cycle, Collins says, will depend on whether the drought continues in key areas, forcing producers to move more cows to feedlots.

Hog prices were below break-even last year and USDA expects production will be down again this year by 1 percent, with an increase in prices. Broilers, hit by a sharp 12 percent decline in exports this year, will see only a 1 percent expansion, with prices up by about 8 percent.

The dairy sector has “the weakest prospects” in the sector, Collins says; a projected price for milk of $11.60 per hundredweight will be the lowest since 1978.

For exports, wheat shipments are expected to be down, corn will increase moderately, and cotton will see “even stronger exports than in the last two years.”

Looking at projections for consumer trends, Collins says the lagging economy will likely keep food consumption this year at about the same level, with little change in “stagnant grocery store sales.”

USDA's projections of changes in consumption patterns to 2020, he says, point to a continuing increase for fruits and vegetables (except potatoes), yogurt, eggs, poultry, grains, and nuts, while declines are expected for red meat, milk, cheese, and potatoes.